Doing Good by Paying Forward

Microfinancing is becoming a popular way of donating to nonprofits by giving or lending money through an online marketplace of sorts.

RON LIEBER

Over the next few days, as you tuck your holiday gifts away, your thoughts may turn to paying some of your good fortune forward.

You won’t be alone. Nonprofits of all sorts receive a flood of traffic to their Web sites in the last week of the year from people moved by the spirit of the season (or the race to lock in a tax deduction for donations before midnight on Dec. 31).

Perhaps the fastest-growing way to act on these altruistic instincts is participating in microfinancing. You take a relatively small amount of money and, through an online marketplace of sorts, give or lend it to a specific person or project whose story moves you. (Not all microfinancing organizations are nonprofits, however, so be aware of the differences.)

This fall, Kiva, one of the leading organizations in a niche that includes others like DonorsChoose and the eBay-owned MicroPlace, came under fire in a blog post by a microfinance researcher named David Roodman. He took Kiva to task for inaccurate information on its Web site about how the loans, made to entrepreneurs in the developing world by its users, actually worked.

Many of those business owners, it turned out, had received their money already; they weren’t left waiting to, say, repair their motorcycle taxis until enough Americans pitched in with $20 loans.

Kiva has since changed its site to reflect this reality more accurately. But the incident poses a question about other organizations that try to provide a direct connection between you and the beneficiaries of your donations or investments: can any of them truly deliver on the promise that many of them imply — that your dollars will go to the particular people or project leader you’ve picked out?

This week, I put that question to some of the leading organizations in this niche. Here’s what they had to say.

KIVA When you sign up to be a lender at Kiva, your money does not go directly to the entrepreneurs whose requests appear on the Web site. Instead, a microfinance institution administers the actual loan.

Often, these Kiva partners engage in what a Kiva founder, Matt Flannery, refers to as “pre-disbursals.” In plain English, that means that borrowers get their loans before their appeals appear on Kiva’s site. So what happens to your money if you lend it through Kiva and direct it toward a particular project? It’s often used, according to the site, to “backfill” the money that Kiva’s local partners have already lent.

This suggests that what Kiva users are really doing is financing the microfinance institutions themselves and not individual entrepreneurs. Kiva argues, however, that any confusion disappears come repayment time.

Whether you get your money back later will depend on whether the people to whom you directed your money repay it. If they don’t, you’ll get nothing unless the local microfinance partner makes good on the loan to stay in Kiva and its users’ good graces.

MICROPLACE Kiva lenders don’t collect interest but are supposed to get their principal back. Individual lenders who use MicroPlace can actually make a small profit.

Like Kiva, MicroPlace draws investors in with stories of ice cream start-ups in Nigeria and such. But it clearly labels each featured individual as a sample borrower. “We don’t make any claims that you are investing in a person,” said Ashwini Narayanan, MicroPlace’s general manager. “You’re investing in a microfinance lender.”

Those lenders are willing to pay a return for access to capital, and MicroPlace investors can aim at investments that can yield up to 6 percent a year. Ms. Narayanan said she hoped that more people would eventually see the site not through the lens of philanthropy but as a portal to an entirely new asset class, like stocks or certificates of deposit, that can also do a lot of good.

MicroPlace isn’t a nonprofit, like the other sites I’ve discussed here. But it pledges to give away any money it makes, say through eBay’s foundation.

As for the lack of a direct connection between lenders and entrepreneurs, MicroPlace makes no apologies. For MicroPlace (or Kiva) to fulfill such a promise completely, people would have to collect requests for loans by hand, translate and post those requests on the Web along with any supporting photos or videos, wait to see if lenders finance them, distribute the money to the field partners and then wait for the partners to make loans to the people who requested them, many of whom live far away from one another.

“It’s not scalable or sustainable, and it’s also very expensive,” Ms. Narayanann said. Instead, MicroPlace has its users finance the microfinance institutions directly.

MODEST NEEDS This operation differs from MicroPlace and Kiva in two significant respects. It is not soliciting loans but donations, which can be tax-deductible for people who itemize. So you don’t get your money back. Then, the money goes to individuals in the United States, not in developing countries. The organization aims to provide one-time grants to people with discrete requests, say someone who still has a job but is short cash for a one-time expense like a car repair or a security deposit.

As with Kiva, Modest Needs contributors can search for recipients by category, like geography and age or whether it’s a health or pet care request. But when they find one they like, they cannot finance it directly. Instead, they receive a point for each dollar they contribute to Modest Needs and put those points toward requests that appeal to them.

Once a request has enough points (a $500 request needs 500 points to be fully financed), then Modest Needs fulfills the request, paying it directly to the person who is owed the money by the recipient, like the mechanic or landlord.

Why does it work this way? According to Keith Taylor, Modest Needs’ founder, the I.R.S. does not allow gifts that one individual has directed specifically to another individual to be tax-deductible. If they were, then people who knew each other might try cheat the system by paying each other’s bills through an organization like Modest Needs and then deducting the contributions.

Modest Needs has the ability to overrule its contributors’ votes, but in practice it almost never does. So contributors do have a direct impact on whether a particular request receives help and can even finance an entire request themselves.

DONORS CHOOSE With DonorsChoose, public school teachers solicit contributions for specific classroom needs, from musical instruments to cameras for a school newspaper.

Here, there are no pre-disbursals or backfilling; if donors don’t finance a project, it simply doesn’t happen. If they do, DonorsChoose buys the materials that the teachers are requesting and sends them to their schools. Later, the donors get thank-you notes from the teachers and often the students too, and photos of the project.

DonorsChoose is unlike Modest Needs in that there is no need for a points system, since the learning materials are not benefiting a specific student.

The founder of DonorsChoose, Charles Best, realizes that he’s lucky that he can deliver on a direct connection between donor and recipient better than many of his peers. “We’re able to meet that standard because we operate in the developed world,” he said. “We’re able to purchase resources instead of passing through cash and needing to collect interest, we have an e-procurement system and we can trust the postal system to deliver to the classroom.”

If this way of giving is appealing, you may wonder whether it’s just a bit self-centered. Plenty of worthy organizations build roads and finance research and can’t draw a direct connection between your small donation and their net results.

Mr. Best doesn’t suggest that you ignore them entirely. “There are programs and sectors where trained professionals should be entrusted to allocate donations to the greatest effect, so I wouldn’t pretend that our model should be everywhere,” he said.

“But wanting to feel a personal connection to the recipient of your gift, giving to a project that best represents your values, and valuing transparency,” he said. “This is all one hundred times more worthy than wanting to sit next to rich and famous people at a charity dinner.”

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